LONDON, Aug 7 (Reuters) - The Turkish lira rallied on Tuesday after suffering its biggest daily fall in nearly 10 years in the previous session as investors eyed growing tensions between Turkey and the U.S., while improved risk appetite boosted emerging market stocks.

Relations between Turkey and the United States have deteriorated sharply over the last week with Washington imposing sanctions on two Turkish ministers over Turkey's detention of U.S. pastor Andrew Brunson on terrorism charges.

One Monday the lira fell some 5.5 percent against the dollar, its biggest single day drop in nearly 10 years, after the Trump administration said it was reviewing Turkey's duty free access to U.S. markets, a move that could affect $1.7 billion of Turkish exports.

But the currency bounced 1.5 percent on Tuesday from a record low of 5.4250 after media reports that a delegation of Turkish officials would go to Washington.

"We may see some stabilisation for the next couple of days until we see how this rapprochement plays out," said Jakob Christensen, head of emerging market research at Danske Bank.

"If it doesn't produce any fruitful solutions we could see further selling given the anxieties in the market," he continued, adding that investors would also be watching out for any possible impact from measures hitting Turkish exports to the U.S. or any constraints on Turkish corporates' refinancing.

Turkey's central bank has also reduced banks' foreign currency reserve requirements to try to stabilise the falling lira. The currency has lost more than 27 percent of its value this year.

Turkish stocks rose over 1 percent and beaten down bank shares gained 2 percent. But yields on local debt continued to climb, with the benchmark 10-year bond yield hitting 19.75 percent, while dollar bonds also remained under pressure.

Turkish five-year credit default swaps also continued to rise, up 2 basis points (bps) from Monday's close to 346 bps, according to IHS Markit data.

Investor sentiment improved across the board after Wall Street's S&P 500 closed at its highest level since Jan. 29 overnight.

Hong Kong shares jumped 1.5 percent, although the trade spat between China and the United States showed little sign of de-escalation.

A Chinese newspaper described Trump's belief that a recent fall in Chinese stocks was a sign he was winning the trade war as "wishful thinking". Both the blue chip index and the Shanghai Composite suffered their worst week since February last week.

The yuan firmed 0.3 percent with Chinese foreign exchange reserves at $3.118 trillion at the end of July, up from $3.112 trillion at end-June.

A weaker dollar also allowed other emerging market currencies to make gains, with South Africa's rand firming 0.6 percent ahead of manufacturing production data. The country's net foreign reserves fell slightly in July to $42.44 billion.